Understanding Self-Employment Taxes

Whether you work as a sole proprietor, single-member LLC, or S-Corp, you will be subject to paying self-employment taxes. Self-employment taxes consist of a 12.4% Social Security tax on income up to an annual income ceiling ($128,400 for 2018) and a 2.9% Medicare tax not subject to any ceiling. All said and done, you’re responsible for paying 15.3% in self-employment taxes if your status is a full-time self-employer. The situation is different if you’re a W2 employee who is moonlighting. We’ll go over examples to better understand how your tax situation will affect you. To conclude, self-employment taxes are equivalent to the total Social Security and Medicare tax paid for an employee.

W2 Employee + Moonlighting or Part Time 1099

If your full time job is at a hospital or surgery center as a salaried W2 CRNA, the Social Security and Medicare tax liabilities are split between the employer and employee. In other words, the employer and employee would each pay 6.2% towards Social Security and each would pay 1.45% towards Medicare (6.2 + 6.2 = 12.4% Social Security & 1.45+1.45 = 2.9% Medicare).

So, let’s say you’re moonlighting at an outpatient surgery center as a 1099. Let’s assume that your annual W2 salary is $150,000 and you 1099 net income is $20,000. How is your salary affected by these taxes?

Because the annual income ceiling for 2018 for Social Security taxes is $128,400, the maximum amount paid into Social Security is $15,921.60. However, remember your employer is responsible for paying half and you pay the other half. As a full time W2 employee making $150,000, the maximum amount of Social Security tax that you will pay is $7,960.80. Your W2 income has maxed you out on Social Security taxes. With regards to Medicare tax, 2.9% of that has been assessed against your $150,000 salary, so your Medicare tax liability on your W2 income is ~$4,350.

How about your 1099 income? Well, since you’ve already maxed out on your Social Security taxes, all that is left is for you to pay Medicare taxes on your NET (not gross) 1099 income, which ends up being $580 ($20,000 * 2.9%).

I’d like to preface that the following statement should be discussed with your accountant and lawyer to arrive at a more comprehensive and nuanced understanding of incorporating and the impact it has on self-employment taxes.

Given that you’re a full time W2 and have already paid the majority of your taxes from your W2 income, you’d have to ask yourself if it’s worth incorporating and paying a CPA/lawyer $1200-$1500 in annual fees to save $580 in Medicare taxes. In my previous post on S-Corp, remember that the primary reason to classify as an S-Corp is to save on Social Security/Medicare taxes. There are other potential options that one may consider like becoming a single-member LLC; that way you can still afford yourself some liability protection with your assets. Or you can remain a sole proprietor who carries malpractice insurance, but as any lawyer will tell, that’s a dicey proposition given that your business and personal assets will be considered one and the same.

Full Time 1099 / Self-Employer

As a full time self-employer, you will be responsible for both the employer and employee Social Security (12.4%) and Medicare (2.9%) contributions.

Two important points to share before we move on to a tax example. (1) Self-employment taxes are calculated on your NET income, not gross. (2) Since you are responsible for paying the employer’s share of self-employment taxes (15.3% / 2 = 7.65%), you can actually deduct that amount against your net business income prior to figuring out your tax liability.

For example, let’s assume your net business income as a full time self-employed CRNA is $150,000. Your business deduction on the self-employment tax is $11,475 ($150,000 * 7.65%). $150,000 – $11,475 = $138,525 will be the amount that is used to calculate your Social Security and Medicare tax liability.

Social Security Tax Liability (12.4%) = $138,525 * .124 = $17,177.10
Medicare Tax Liability (2.9%) = $138,525 * .029 = $4,017.22
Self Employment Tax Total = $21,194.33

And that is why it is advantageous, from a tax perspective, to become an S-Corp. You have a $21,194 tax bill, but your CPA can help you set up a payroll system in which you pay yourself a salary and take the remaining net income as a corporate distribution.

S-Corp (Corporate Distribution + Payroll of 1)

Using the previous example to demonstrate how you can save on taxes by incorporating as a full time 1099 CRNA, let’s say you split the $150,000 net business income; $75,000 that goes to you as an employee of your own S-Corp and $75,000 that goes to the S-Corp as a corporate distribution. ONLY THE SALARY IS SUBJECT TO SOCIAL SECURITY AND MEDICARE TAXES, NOT THE CORPORATE DISTRIBUTION.

S-Corp Salary: $75,000
Business Deduction: $5,737.50 ($75,000 * 7.65%)
Salary to Calculate SS/Medicare Taxes: $69,262.50 ($75,000-$5,737.50)
Social Security Taxes (12.4%) = $8,588.55 ($69,262.50 * 0.124)
Medicare Taxes (2.9%) = $2,008.61 ($69,262.50 * .029)
Self Employment Tax Total = $10,597.16.

If you work as a full time 1099 and did not incorporate, your tax liability on a net business income of $150,000 would be $21,194. If you had incorporated yourself, your tax liability would be $10,597. That’s a difference of ~$10,600!

If you’re working full time as a 1099 and you’re anticipating a high net business income, it makes financial (and legal) sense to become an S-Corp. If you’re a full time W2 employee who does 1099 on the side, that remains to be seen, at least from a financial perspective. For the latter, it comes down to your risk tolerance and whether you’re comfortable with pursuing 1099 work as a sole proprietor or a single member LLC (which DOES afford some level of liability protection).

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